There are several strategies to maximize your retirement and improve the amounts you will receive once you leave the labor market. The disbursement order is one of them. Here’s what its regarding.
When you are retired, you can have different sources of income: employer pension funds, government retirement pensions, RRSPs, TFSAs, etc. This is where you need to think regarding how you will withdraw these monies when the time comes, because a simple change in the disbursement order can make a big difference.
Many people believe that once they retire, the best way to maximize their assets is to defer taxes. However, this is not always the ideal solution, warns Jean-Philippe Vézina, financial planner and tax expert, Équipe Jean-Maurice Vézina.
A concrete example
This numerical example will convince you: let’s take a retired married couple. Mr. is 62 years old and Mrs. 64. Mr. receives 80% of the maximum QPP and his wife 70%.
The couple will receive the Old Age Security Pension at age 65.
Mrs. holds the following investments: $81,500 in a TFSA, $50,000 in an RRSP and $100,000 in a bank account (non-registered).
Mr. holds the following investments: $200,000 in an RRSP and $50,000 in a TFSA.
They need a monthly net income of $4,000 indexed to pay their expenses.
They have a balanced investor profile and the death is estimated at 95 years.
The estimated long-term inflation level is 2%.
Jean-Philippe Vézina used advanced financial planning software and considered the projection standards of the Quebec Institute of Financial Planning, and here are the results obtained.
Very different results
If the couple disburses the low-tax investments first, ie withdrawing the non-registered and the TFSA before the RRSP/RRIF, they will run out of money before the age of 95.
Conversely, if he redeems the heavily taxed investments first, that is to say by disbursing the RRSP/RRIF before the non-registered one and the TFSA, the couple will reach 95 without running out of money, but just barely.
Finally, if the couple decides instead to implement a mixed disbursement strategy, by withdrawing sums from the RRSP/RRIF, the TFSA and the non-registered bank account at the same time in order to be able to maintain substantially the same taxable income throughout their retirement , he will not only have enough money until age 95, he will even have a surplus of $78,000 at that time.
The order of disbursement is therefore a very important variable to take into account at retirement.
